According to the Institute for Fiscal Studies, graduates in England and Wales will pay up to 12% interest on their student loans later this year.
The financial watchdog said the rate will more than double from its current 4.5% as there was “no good reason” for the “stunning” rise amid the crisis in the cost of living.
The IFS predicted that this year will be a “rollercoaster ride” for graduates who have taken out student loans since 2012.
The new rates would mean that students would have to pay higher interest rates on their loans than homeowners who pay off mortgages.
The Institute for Fiscal Studies (IFS) has calculated that due to the current inflation of the retail price index (RPI), the maximum interest rate on loans – paid by those earning £49,130 or more – will rise from current rates of 4.5% to 12 % for half a year.
Low-income interest rates will rise from 1.5% to 9%, the IFS said.
They added that this means that a high-earning recent graduate with a typical loan balance of £50,000 would accrue £3,000 in interest for six months, a higher amount than a graduate earning three times the average salary for recent graduates would usually pay. .
The IFS said the maximum student loan rate would then fall to about 7% by March 2023, fluctuating between 7% and 9% over a year and a half.
According to the Institute for Fiscal Studies, graduates in England and Wales will pay up to 12% interest on the repayment of their student loans later this year.
“In September 2024, it is then predicted to fall to about 0% before rising again to about 5% in March 2025,” the IFS said.
“These wild interest rate swings are the result of the combination of high inflation and an interest rate ceiling that takes half a year to kick in.”
The IFS said that without the fee cap, maximum fees would be 12% during the 2022/23 academic year, rising to about 13% in 2023/24.
They said the “interest rollercoaster” would pose problems, as the interest cap penalizes students with falling debt.
It can also dissuade students from attending college, or encourage graduates to pay off loans if doing so would not benefit them financially.
The eye-watering increases are linked to the Retail Price Index and an increase in the cost of living.
Interest rates on student loans are usually charged between RPI inflation and RPI inflation plus 3%.
But there is a lag between RPI inflation and student loan interest rates, which means the current high inflation rate will lead to high student loan interest rates before 2022/23, according to the IFS.
“This high reading implies a dazzling rise in student loan interest to between 9% and 12%,” the IFS said.
‘That is not only much more than the average mortgage rate, but also more than many types of unsecured credit. Student loan borrowers might rightly wonder why the government is charging them higher interest rates than private lenders are offering,” she added.
Student loan interest rates are not meant to be above the market rate, but between when the market rate is measured and the DfE takes action, that means students will pay unlimited rates between September 2022 and February 2023.
The situation is likely to be disadvantageous for higher earning graduates. Borrowers whose debt decreases over time will be charged more than those with increasing debt.
The IFS said this would lead to “unfortunate redistribution” among graduates.
Ben Waltmann, senior research economist at the IFS, said: “Unless the government changes the way student loan rates are set, there will be wild swings in interest rates over the next three years.”
The maximum rate will hit a dazzling 12% level between September 2022 and February 2023 and a low of around zero between September 2024 and March 2025.
‘There is no good economic reason for that. Interest rates on student loans should be low and stable, reflecting the government’s own cost of borrowing.
“The government urgently needs to adjust the operation of the interest rate ceiling to avoid a sharp spike in September.”